Why REITs, why now, why us?

This results season was one of the strongest REITs have delivered since COVID driven by Goodman Group (ASX: GMG) delivering 28% EPS growth on 1H23 and retail REITs’ operational earnings proving to be more resilient than expected.

Goodman Group have gone from strength to strength as they unveiled their data centre development pipeline increasing from 3.7GW to 4GW with a build-out value of $50-$60 billion. The inclusion into the EPRA NAREIT index (where an estimate of $900 million in shares needed to be bought) has also contributed to a 22% return YTD.

Retail REITs, particularly large retail malls, reported strong operational metrics with average releasing spreads of 3.9% (strongest in a decade), occupancy close to being full and strong double-digit sales growth. This translated to a multi-year low occupancy cost (rent/sales) of 16% versus the long-term average of 17%-19%.

With COVID, inflation and interest rate headwinds behind us, we expect FY24 to be the trough in earnings and the sector is expected to deliver strong earnings growth going forward. We believe the recovery in the sector will be earnings-led rather than based on valuations as transaction volumes remain stagnant whilst the cost of capital remains high.

Why us?

GMG: We believe GMG’s 28% EPS growth in 1H24 highlights how conservative FY24 guidance is (3-year OEPS CAGR of 10%) when considering it is only starting to ramp up its data centre strategy (it has delivered 0.6GW of data centre projects to date out of a total power bank of 4GW). Whilst the shares continue to trade at a premium to the peer group, we still believe the risk-reward stacks up when you consider the attractive land bank, largely located in supply-constrained markets coupled with a strong balance sheet and proven track record. We maintain our maximum holding in GMG.

SCG: Whilst the market remains focused on the potential impact of a slowdown in consumer spending, we believe this misses the attractive upside from driving more value from an improved tenant mix and the medium-term focus on developments, capital partnering and refinancing its expensive debt.

In an environment where supply is constrained and population growth is high, combined with strong sales growth and low occupancy costs, this supports our view that mall rents remain at very sustainable levels for tenants. Trading at an 11% discount to NTA and offering a 5.6% dividend yield, we see further scope for outperformance.